We are a global leader in providing open source software technologies to enterprise customers. These offerings include our core enterprise operating system platform, Red Hat Enterprise Linux, our enterprise middleware platform, Red Hat JBoss Middleware, as well as our virtualization, cloud, and storage offerings and other Red Hat enterprise technologies.

Open source software is an alternative to proprietary software and represents a different model for the development and licensing of commercial software code than that typically used for proprietary software. Because open source software code is often freely shared, there are customarily no licensing fees for the use of open source software. Therefore, we do not recognize revenue from the licensing of the code itself. We provide value to our customers through the development, aggregation, integration, testing, certification, delivery, maintenance and support of our Red Hat enterprise technologies, and by providing a level of performance, reliability, scalability and security for the enterprise technologies we package and distribute. Moreover, because communities of developers not employed by us assist with the creation of our open source offerings, opportunities for further innovation of our offerings are supplemented by these communities.

We primarily offer our enterprise technologies in the form of annual or multi-year subscriptions, and we recognize revenue over the period of the subscription agreements with our customers. We market our offerings primarily to enterprise customers including large enterprises, government agencies, small- and medium-size businesses and educational institutions.

We have focused on introducing and gaining acceptance for Red Hat enterprise technologies that comprise our open source architecture. Our core enterprise operating system platform, Red Hat Enterprise Linux, has gained widespread independent software vendor ("ISV") and independent hardware vendor ("IHV") support. We have continued to build our open source architecture by expanding our enterprise offerings and introducing middleware, virtualization, cloud, storage and other offerings.

We derive our revenue and generate cash from customers primarily from two sources: (i) subscription revenue and (ii) training and services revenue. These arrangements typically involve subscriptions to Red Hat enterprise technologies. Our revenue is affected by, among other factors, corporate, government and consumer spending levels. In evaluating the performance of our business, we consider a number of factors, including total revenue, deferred revenue, operating income, operating margin and cash flows from operations.

The arrangements with our customers that produce this revenue and cash are explained in further detail in Part II, Item 7 under "Critical Accounting Policies and Estimates" and in NOTE 2-Summary of Significant Accounting Policies to the Consolidated Financial Statements of our Annual Report on Form 10-K for the year ended February 29, 2012.

In our fiscal year ended February 29, 2012, we focused and expect in our fiscal year ending February 28, 2013 to continue to focus on, among other things, generating (i) widespread adoption of Red Hat enterprise technologies, including virtualization, cloud and storage technologies, by users globally,
(ii) increased revenue from our existing user base by renewing existing subscriptions, converting users of free versions of our enterprise technologies to paying subscribers, providing additional value to our customers and growing the number of open source enterprise technologies we offer, (iii) increased revenue by providing additional consulting and other targeted services and
(iv) increased revenue from channel partner relationships, including original equipment manufacturers ("OEMs"), IHVs, ISVs, cloud computing providers, value added resellers ("VARs") and system integrators, and from our own international expansion, among other means.

Revenue. For the three months ended November 30, 2012, total revenue increased 18.5% or $53.6 million to $343.6 million from $290.0 million for the three months ended November 30, 2011. Subscription revenue increased 19.3% or $47.6 million, driven primarily by additional subscriptions related to our principal Red Hat Enterprise Linux ("RHEL") technologies, which continue to gain broader market acceptance in mission-critical areas of computing, and our expansion of sales channels and geographic footprint. The increase is, in part, a result of the continued migration of enterprises in industries such as financial services, government, technology and telecommunications to our open source solutions from proprietary technologies. Training and services revenue increased 13.6% or $5.9 million for the three months ended November 30, 2012 as compared to the three months ended November 30, 2011. We believe that the growth rate for our training and services revenue was adversely affected by an overall macroeconomic environment in which enterprises remained cautious with respect to discretionary items such as training and consulting and by our efforts to enable channel partners to provide consulting services that can generate additional subscription revenue for us.

We believe the success of our business model is influenced by:

• the extent to which we can expand the breadth and depth of our technology and service offerings;

• our ability to enhance the value of subscriptions for Red Hat enterprise technologies through frequent and continuing innovations to these technologies while maintaining stable platforms over multi-year periods;

• our ability to generate increasing revenue from channel partner and other strategic relationships, including distributors, OEMs, IHVs, ISVs, cloud computing providers, VARs and system integrators;

• the acceptance and widespread deployment of open source technologies by small, medium and large enterprises, educational institutions and government agencies;

• our ability to generate recurring subscription revenue for Red Hat enterprise technologies; and

• our ability to provide customers with consulting and training services that generate additional revenue.

Deferred Revenue. Our deferred revenue, current and long-term, balance at November 30, 2012 was $987.7 million. Because of our subscription model and revenue recognition policies, deferred revenue improves predictability of future revenue. Deferred revenue at November 30, 2012 increased $41.0 million or 4.3% as compared to the balance at February 29, 2012 of $946.7 million.

The increase in deferred revenue reported on our Consolidated Balance Sheets of $41.0 million differs from the $56.5 million increase in deferred revenue we reported on our Consolidated Statements of Cash Flows for the nine months ended November 30, 2012 due to changes in foreign currency exchange rates used to translate deferred revenue balances from our foreign subsidiaries' functional currency into U.S. dollars.

Subscription revenue. Our enterprise technologies are sold under subscription agreements. These agreements typically have a one- or three-year subscription period. The subscription entitles the end user to maintenance, which generally consists of a specified level of support, as well as security updates, fixes, functionality enhancements and upgrades to the technology, when and if available, during the term of the subscription. Our customers have the ability to purchase higher levels of subscriptions that increase the level of support the customer is entitled to receive. Subscription revenue increased sequentially for the first, second and third quarters of fiscal 2013 and each quarter of fiscal 2012, 2011 and 2010 and is being driven primarily by the increased market acceptance and use of open source software by the enterprise and our expansion of sales channels and geographic footprint during these periods.

Revenue by geography. For the three months ended November 30, 2012, approximately $150.0 million or 43.7% of our revenue was generated outside the United States compared to approximately $130.2 million or 44.9% for the three months ended November 30, 2011. Our international operations are expected to grow as our international sales force and channels become more mature and as we enter new locations or expand our presence in existing locations. As of November 30, 2012, we had offices in more than 75 locations throughout the world.

We operate our business in three geographic regions: the Americas (U.S., Latin America and Canada); EMEA (Europe, Middle East and Africa); and Asia Pacific (principally Japan, Singapore, India, Australia, South Korea and China). Revenue generated by the Americas, EMEA and APAC for the three months ended November 30, 2012 totaled $220.3 million, $74.2 million and $49.1 million, respectively, which resulted in year-over-year revenue growth in the Americas, EMEA and APAC of 19.7%, 12.5% and 22.5% respectively. Our growth rate in EMEA was adversely affected by fluctuations in exchanges rates between the U.S. Dollar and the Euro. Excluding the impact of foreign currency exchange rates, EMEA revenue grew 19.6% for the three months ended November 30, 2012 as compared to the three months ended November 30, 2011. As we expand further within each region, we anticipate revenue growth rates in local currencies to be similar among our geographic regions due to the similarity of products and services offered and the similarity in customer types or classes.

Gross profit. Overall gross profit margin increased to 84.5% for the three months ended November 30, 2012 from 84.4% for the three months ended November 30, 2011 due to a product-mix shift from training and services to subscriptions.

Gross profit margin by geography. Gross profit margins generated by our geographic segments for the three months ended November 30, 2012 were as follows: Americas-84.8%, EMEA-88.4% and APAC-84.9%. For the three months ended November 30, 2011, gross profit margins generated by our geographic segments were as follows: Americas-85.0%, EMEA-86.7% and APAC-83.5%. As we continue to expand our sales and support services within our geographic segments, we expect gross profit margins to further converge over the long run due to the similarity of products and services offered, similarity in production and distribution methods and the similarity in customer types or classes. These geographic profit margins exclude the impact of share-based compensation expense, which was not allocated to our geographic segments.

Income from operations. Operating income was 14.5% and 18.5% of total revenue for the three months ended November 30, 2012 and November 30, 2011, respectively. The decrease in operating income as a percentage of revenue was due to investments made to expand our sales and marketing and research and development functions as well as costs incurred to relocate our headquarters, update our data processing systems and acquire two businesses. These investments, which are described further in our analysis of results of operations below, increased operating expenses as a percent of revenue to 70.0% for the three months ended November 30, 2012 from 65.9% for the three months ended November 30, 2011.

Income from operations by geography. Operating income as a percentage of revenue generated by our geographic segments for the three months ended November 30, 2012 was as follows: Americas-21.5%, EMEA-24.2% and APAC-23.2%. For the three months ended November 30, 2011, income from operations as a percentage of revenue generated by our geographic segments was as follows: Americas-25.2%, EMEA-28.5% and APAC-22.7%. These geographic operating margins exclude the impact of share-based compensation expense, which was not allocated to our geographic segments.

Cash, cash equivalents, investments in debt and equity securities and cash flow from operations. Cash, cash equivalents and short-term and long-term available-for-sale investments in securities balances at November 30, 2012 totaled $1.35 billion. Cash generated from operating activities for the three months and nine months ended November 30, 2012 totaled $100.2 million and $328.4 million, respectively, which represents increases of 3.7% and 24.5% in operating cash flow as compared to the three months and nine months ended November 30, 2011, respectively. These increases are due to increases in subscription and services revenues, billings and collections during the same periods.

Our significant cash and investment balances give us a measure of flexibility to take advantage of opportunities such as acquisitions, increasing investment in international areas and repurchasing our common stock.

Foreign currency exchange rates' impact on results of operations. Approximately 43.7% of our revenue for the three months ended November 30, 2012 was produced by sales outside the United States. We are exposed to significant risks of foreign currency fluctuation primarily from receivables denominated in foreign currency and

are subject to transaction gains and losses, which are recorded as a component in determining net income. The income statements of our non-U.S. operations are translated into U.S. dollars at the average exchange rates for each applicable month in a period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign-currency-denominated transactions results in increased revenue and operating expenses from operations for our non-U.S. operations. Similarly, our revenue and operating expenses will decrease for our non-U.S. operations if the U.S. dollar strengthens against foreign currencies.

Using the average foreign currency exchange rates from the third quarter of our prior fiscal year ended February 29, 2012, our revenue and operating expenses from non-U.S. operations for the three months ended November 30, 2012 would have been higher than we reported by approximately $6.7 million and $4.8 million, respectively, which would have resulted in income from operations being higher by $1.9 million.

Using the average foreign currency exchange rates for the nine months ended November 30, 2011, our revenue and operating expenses from non-U.S. operations for the nine months ended November 30, 2012 would have been higher than we reported by approximately $29.3 million and $21.4 million, respectively, which would have resulted in income from operations being higher by $7.9 million.

Business combinations. During the nine months ended November 30, 2012, we acquired two businesses operating in the middleware space. These acquisitions include technologies that are complementary to our JBoss middleware technology. One acquisition, which included certain assets and related operations acquired from Polymita Technologies S.L., closed on August 28, 2012. The second acquisition closed on September 7, 2012 and included certain assets and related operations acquired from FuseSource, a division of Progress Software Corporation. Transaction fees related to these two acquisitions totaled approximately $1.0 million for the nine months ended November 30, 2012 and are included in general and administrative expense on our Consolidated Statement of Operations for the nine months ended November 30, 2012. As a result of these acquisitions, we anticipate operating expenses will increase by approximately $4.0 million and $8.0 million, respectively, for the three months and fiscal year ending February 28, 2013.

On December 21, 2012, we completed the acquisition of ManagelQ, Inc. ("ManagelQ"), a Delaware corporation, for approximately $104.5 million in cash. ManagelQ develops, distributes and provides support for enterprise cloud management and automation software. As a result of the acquisition of ManagelQ, we expect that operating expenses will increase by approximately $4.0 million for the three months and fiscal year ending February 28, 2013.

On October 7, 2011, we acquired Gluster, Inc. ("Gluster"). Gluster develops, distributes and provides support for open-source, scale-out storage software. The acquisition expands our enterprise software offerings to include management of unstructured data. Total consideration transferred as part of the acquisition was $137.2 million and includes cash consideration of $135.9 million and equity consideration related to assumed, nonvested employee share-based awards of $1.2 million. The total fair value, as of October 7, 2011, of all assumed nonvested awards was $14.5 million, of which $1.2 million has been attributed to pre-acquisition employee services and accordingly has been recognized as consideration transferred. The remaining $13.3 million of fair value will be recognized as compensation expense over the remaining vesting period. See NOTE 14-Business Combinations to our Consolidated Financial Statements for further discussion related to our acquisition of Gluster.

Facility Exit Costs. In December 2011, we entered into an agreement to sublease a building located in downtown Raleigh, North Carolina to accommodate growth in the business. In connection with the transition to our new building, we have endeavored to assign, sublease or otherwise dispose of our existing leases related to the two facilities that currently constitute our headquarters in Raleigh, North Carolina.

In May 2012, we entered into a sublease agreement with an unrelated third-party to lease one of the two facilities. As a result, we have recognized a loss of $3.1 million for the nine months ended November 30, 2012 which represents the excess of our remaining obligation on the space over the agreed sublease income.

We will continue to market the remaining facility for sublease. However, to the extent we are unable to sublease or otherwise dispose of such space and recover the full amount of our remaining obligation, we will be required to recognize a loss at the date we cease using this facility, currently estimated to be May 2013. At that time, our net loss with respect to the remaining facility is expected to be approximately $4.0 million.

Amortization of related leasehold improvements has been accelerated to coincide with our exit from the two facilities. This change in estimated useful life resulted in incremental depreciation expense of $0.4 million and $2.5 million for the three months and nine months ended November 30, 2012, respectively, and is included in general and administration expense on our Consolidated Statement of Operations.

                             RESULTS OF OPERATIONS

Three months ended November 30, 2012 and November 30, 2011

The following table is a summary of our results of operations for the three
months ended November 30, 2012 and November 30, 2011 (in thousands):



                                              Three Months  Ended
                                                  (Unaudited)
                                       November 30,          November 30,            $               %
                                           2012                  2011              Change         Change
Revenue:
Subscriptions                         $      294,186        $      246,538        $ 47,648           19.3 %
Training and services                         49,420                43,488           5,932           13.6

Total subscription and training
and services revenue                         343,606               290,026          53,580           18.5

Cost of subscription and
training and services revenue:
Cost of subscriptions                         21,153                17,041           4,112           24.1
As a % of subscription revenue                   7.2 %                 6.9 %
Cost of training and services                 31,965                28,148           3,817           13.6
As a % of training and services
revenue                                         64.7 %                64.7 %

Total cost of subscription and
training and services revenue                 53,118                45,189           7,929           17.5
As a % of total revenue                         15.5 %                15.6 %

Total gross profit                           290,488               244,837          45,651           18.6

Operating expense:
Sales and marketing                          133,792               107,561          26,231           24.4
Research and development                      68,655                53,739          14,916           27.8
General and administrative                    38,122                29,965           8,157           27.2
Facility exit costs                               -                     -               -              -

Total operating expense                      240,569               191,265          49,304           25.8

Income from operations                        49,919                53,572          (3,653 )         (6.8 )
Interest income                                1,936                 2,075            (139 )         (6.7 )
Other income (expense), net                     (730 )                (227 )          (503 )        221.6

Income before provision for
income taxes                                  51,125                55,420          (4,295 )         (7.7 )
Provision for income taxes                    16,360                17,180            (820 )         (4.8 )

Net income                            $       34,765        $       38,240        $ (3,475 )         (9.1 )%

Gross profit
margin-subscriptions                            92.8 %                93.1 %
Gross profit margin-training and
services                                        35.3 %                35.3 %
Gross profit margin                             84.5 %                84.4 %
As a % of total revenue:
Subscription revenue                            85.6 %                85.0 %
Training and services revenue                   14.4 %                15.0 %
Sales and marketing expense                     38.9 %                37.1 %
Research and development expense                20.0 %                18.5 %
General and administrative
expense                                         11.1 %                10.3 %
Facility exit costs                               -                     -
Total operating expenses                        70.0 %                65.9 %
Income from operations                          14.5 %                18.5 %
Income before provision for
income taxes                                    14.9 %                19.1 %
Net income                                      10.1 %                13.2 %
Estimated annual effective
income tax rate                                 32.0 %                31.0 %

Revenue

Subscription revenue

Subscription revenue, which is primarily comprised of direct and indirect sales of Red Hat enterprise technologies, increased by 19.3% or $47.6 million to $294.2 million for the three months ended November 30, 2012 from $246.5 million for the three months ended November 30, 2011. The increase in subscription revenue is primarily due to increases in volumes sold, including additional subscriptions attributable to geographic expansion, and continuing innovation, which attracts new customers and helps to drive renewals from existing customers.

Training and services revenue

Training revenue includes fees paid by our customers for delivery of educational materials and instruction. Services revenue includes fees received from customers for consulting services regarding our offerings, deployment of Red Hat enterprise technologies and for delivery of added functionality to Red Hat enterprise technologies for our major customers and OEM partners. Total training and services revenue increased by 13.6% or $5.9 million to $49.4 million for the three months ended November 30, 2012 from $43.5 million for the three months ended November 30, 2011. Training revenue increased 8.2% or $1.1 million, as some enterprises increased overall spending on discretionary items such as training despite the current economic environment. Our services revenue increased by 16.2% or $4.8 million as a result of an increase in consulting engagements driven by increased demand for our open source solutions. Combined training and services revenue decreased as a percentage of total revenue to 14.4% for the three months ended November 30, 2012 from 15.0% for the three months ended November 30, 2011.

Cost of revenue

Cost of subscription revenue

The cost of subscription revenue primarily consists of expenses we incur to support, distribute, manufacture, augment and package Red Hat enterprise technologies. These costs include labor related cost to provide technical support and maintenance, as well as costs for fulfillment, physical media and literature. Cost of subscription revenue increased by 24.1% or $4.1 million to $21.2 million for the three months ended November 30, 2012 from $17.0 million for the three months ended November 30, 2011. The increase is partially the result of continued additions to our technical support staff to meet the demands of our growing subscriber base for support and maintenance, and includes additional compensation of $2.4 million. The remaining increase is driven by increased expense related to expansion of support facilities and incremental amortization expense related to technology acquisitions. Gross profit margin on subscriptions decreased to 92.8% for the three months ended November 30, 2012 from 93.1% for the three months ended November 30, 2011. As the number of open source technology subscriptions continues to increase, we expect associated support cost will continue to increase, although we anticipate this will occur at a rate slower than that of subscription revenue growth due to economies of scale.

Cost of training and services revenue

Cost of training and services revenue is mainly comprised of personnel and third-party consulting costs for the design, development and delivery of custom engineering, training courses and professional services provided to various types of customers. Cost of training and services revenue increased by 13.6% or $3.8 million to $32.0 million for the three months ended November 30, 2012 from $28.1 million for the three months ended November 30, 2011. The cost to deliver training decreased 2.8% or $0.2 million to $7.7 million for the three months ended November 30, 2012 compared to $7.9 million million for the three months ended November 30, 2011. In addition, the cost to deliver training as a percentage of training revenue decreased to 50.8% for the three months ended November 30, 2012 from 56.5% for the three months ended November 30, 2011 due to better

utilization of both instructors and class room space as we transition from an on-site, employee-based, fixed-cost delivery model to a variable-cost delivery model with a global training partner that provides training services on our behalf. Costs to deliver our services revenue increased by 19.9% or $4.0 million and relate to additional employee compensation and travel associated with additions to our staff. Total costs to deliver training and services as a percentage of training and services revenue was 64.7% for each of the three month periods ended November 30, 2012 and November 30, 2011.

Gross profit

Gross profit margin increased to 84.5% for the three months ended November 30, . . .